Three Reasons why Cutting your Prices will Cause More Pain than Profit

By Mish Slade

July 14, 2016

Offering competitive prices in order to get noticed, or to win a piece of business is a tactic employed by many. Although it can often provide a much needed boost in terms of short-term sales, is it sustainable in the long-run? And can it actually end up causing more harm than good?

Here’s an easy way to stand apart from the competition and get new clients: be the cheapest. It’s quick to implement (just drop your rates and announce it in a few places), it requires zero imagination, you’re unlikely to do it wrong, and you’ll no doubt succeed in achieving exactly what you set out to do: find new clients.

But is “cheapness” a long-term advantage? Is it maintainable? Will you enjoy the work you do? Experience suggests not. When organisations have “cut-price” built into them from the ground up (like Ryanair or Walmart), that’s one thing. But if you’re providing any sort of client-facing service that requires creativity, expertise and passion, that’s quite another. Whether you’re a law firm, a web design company, an advertising agency, a publisher, or any other kind of services business there are definite drawbacks to this approach.

#1: Cheap prices attract cheap clients

You know how some companies (especially SAAS companies) offer different-priced “packages” of services? Those firms provide a superb insight into the way clients behave according to what they pay. Perhaps counter-intuitively, it’s usually the clients on the “free” or “basic” packages who cause the most aggro: they don’t value what the company does for them, so they hit them up with all kinds of demands and requests – eating into customer service time (and wages). What’s more, those clients are rarely satisfied, and they’ll leave you as soon as they find out about another, cheaper service than yours.

Clients on the “premium” or “enterprise” packages however, can be a dream to work with: they’re paying good money in order to outsource the task away from them, and they trust that the company knows what it’s doing. This is the kind of client you want to end up with – but if you keep your prices too low, you’ll never be able to attract them.

#2: You’ll struggle to hire the best talent

If you want to charge your clients bargain basement rates, you’ll usually have to pass those savings on to your employees in the form of lower wages – which means you’ll be forced to pick from a smaller group of potential staff who are willing to work for less.

Highly skilled, motivated and intelligent employees know their worth; not only do they want to get paid fairly, but they also see their pay as a reflection of how much the company values them. (And anyway, there’d be no point in having fantastic employees if they’ll be working on projects no one values – not even the client.)

As for the people you do hire: it’ll be tough to get them pumped about the service they provide when they know they’ve been touted as the “cheap” option. Lower engagement, reduced morale, poor productivity and decreased retention are likely side-effects.

#3: You won’t be the cheapest for long

As best-selling author and marketing guru Seth Godin says, “Someone else is always willing to go a penny lower than you are, and to compete, your choices get ever more limited.” And what happens when you inevitably lose that race to the bottom – when someone comes along and you simply can’t match their prices? Then your USP is that you’re the “second cheapest” around – and that doesn’t have quite the same ring to it.

There’s another way!

There are other, better, more enjoyable and satisfying ways to stand apart from the competition – and none of them come down to price.

#1: Be better

Back to Seth… “Without a doubt, there’s a slot in every market for the cheap enough, good enough alternative. But rapid growth and long-term loyalty come from being better instead. When your product or your service don’t measure up, the answer probably isn’t to lower your price or offer a refund to the disappointed customer. Instead, the alternative is to invest in making it better. So much better that people can’t help but talk about it – and so much better that they would truly miss it if it were gone.”

We already know this is true, of course: think about food stores like Waitrose, Marks & Spencer and Whole Foods. They wouldn’t exist – let alone thrive – if every person made their decision based on price alone. Those stores must be better than their cheaper alternatives, of course: otherwise it wouldn’t take long for everyone to realise that they’re better off going somewhere else. The same principle is true for service-based businesses.

The reason you went with a pricier option for your website designer over “Cheap Websites 4U”? Because you knew you’d get a better service, a better website, and importantly – better value for money too. If you want to build loyalty, you need to provide something that’s of genuine value to your customer – not a bargain basement price.

#2: Be different

It’s tough to stand apart from the competition in a crowded market, but it can be done. It all stems from figuring out your unique identity – what you stand for and what you believe in – and conveying that when marketing your business and working with clients.

Take Brian Friedman, a wedding photographer in New York. He’s all about making New York City “the bridesmaid” at your wedding. He adores the city, and believes you need to make it part of the love story if you have your wedding there. It’s a different approach from most other photographers, certainly – but it demonstrates his passion and shows that you’re not going to get just any old wedding photos for your money.

“Price, taken by itself, is nothing but the monetary expression of value.” – Karl Marx – philosopher

Or look at Horton & Garton, an estate agency based in West London. Their “about” page provides a good indication of their active involvement in the local community, but you can also ask any former client or indeed resident of the area: they know John Horton like a dear friend, and they all talk about his local knowledge, experience, and love for his area. That’s what makes Horton & Garton different from the many other estate agencies around, and they don’t need anything else to stand apart from the competition.

#3: Stay strong!

When you refuse to be cheap, there’s a good chance you’ll be asked to drop your prices by potential clients – and the quickest, easiest thing to do would be just that.

But there are other ways out, too. As business growth expert Ian Altman explains, “Price pressure either comes out of the fact that you did not help the client appreciate your unique value, or they just want to see if they can pay less.” In order to help them appreciate your value, you simply need to show them how you’re different and how you’re better – both of which are covered above. And when it comes to their (cheeky yet understandable) attempt to pay less, Altman has a strategy to help you counter it:

“When your prospect says ‘You are more expensive than the other vendor,’ how do you react? You could simply drop your price and hope that does the trick. Or, you might ask a question like ‘We are never the least expensive. I appreciate that you probably need to see a few things that demonstrate a return on investment to be comfortable paying a bit more for us. What are the most important areas I can show you?’ You might be surprised when your prospect explains how easy it is to make them comfortable spending a bit more for your product or service.” And remember: if your competitor truly is offering a lower price for the same value, your potential client wouldn’t be calling to see if you can match it.

Price isn’t a sustainable advantage

If you want to compete, you need to look beyond simply lowering your prices: cheap prices attract the sorts of clients who’ll leave the minute someone else comes along and undercuts you. Far better to invest in a superior service while conveying what you stand for and uniquely believe in as a company – which will in turn attract your perfect clients and help them to stay loyal to you, even when you’re not the cheapest.

Always remember that price is what people pay, but value is what they get. If you are consistently charging low prices, you’re either doing yourself a massive disservice, or you’re admitting that you’re not offering much in the way of value.

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